Sterling extends gains after BoE keeps rates on hold

The British pound extended its rally on Friday for a second consecutive day following the Bank of England's decision to keep interest rates steady on signs of a post-election pick-up in growth. But analysts said the rally may be short-lived. The United Kingdom exits the European Union at 2300 GMT on Friday and faces negotiations on reaching a new trade and future relationship deal with the bloc by the end of 2020 -- something the EU has said will not be easy.

"Looking ahead, there are more downside risks to the pound as investors gauge the progress of the Brexit negotiations," said Morten Lund, a strategist at Danske Bank who expects euro/pound to rise to 86 pence over the coming months. But on Friday, sterling gained 0.3% to as high as $1.3141, its highest level in eight days. Against the euro, the British currency rose 0.2% to 84.07 pence.

On a weekly basis, the pound was on track for a second consecutive week of gains against the dollar. Risk reversals and implied volatility gauges for the pound signaled calm over the next few months, with both indicators holding near recent lows.

The Bank of England kept interest rates steady at Governor Mark Carney's final policy meeting as it saw signs of a post-election pick-up in growth which weakened the case for immediate action to help the lackluster economy.